Export Development Canada said Thursday demand for its financing products skyrocketed in the final months of 2008 just as the financial crisis kicked into high gear, leading the Crown agency to set a record year in terms of business conducted.
But along with new business came bigger provisions for credit losses and a 56% drop in profit. It expects higher claims and impaired loans to continue into 2009 as the credit crisis grinds on.
Further, EDC said, the number of larger corporations that sought financial support also climbed -- a sign of tight credit conditions and an indication that its services may be in high demand once it is allowed to enter the domestic lending market upon final approval of the budget bill.
As it happens, the government-owned financier said its participation with private-sector banks on transaction financing increased 20% in 2008, to $14.1-billion, in support of 4,450 deals.
"As 2008 began, EDC anticipated lower business volumes as economic conditions softened, slowing export growth. By the fourth quarter, the extent of the slowdown had created an escalating demand for our services -- far beyond any prediction and in an environment of far greater risk," Mr. Siegel said.
Tighter credit conditions prompted the federal government to boost the Crown agency's borrowing authority and inject additional capital onto its balance sheet, as well as giving it a two-year timeframe to make credit available to transactions outside of its normal mandate, which is export-oriented.
Chief executive Eric Siegel said as envisaged, EDC expects to play a role by providing reinsurance to support the credit insurance and surety bond industries, and either participate in lending syndicates with chartered banks or provide business loan guarantees.
The House of Commons voted in favour of the budget bill on Wednesday night that gives EDC these newfound powers, and it is currently before the Senate for its OK. It then needs royal assent from the Governor-General to become law.
"We anticipate being ready to go the minute the legislation gives us the power to do that," Mr. Siegel said, adding it has talked to private-sector lenders and insurers as to where EDC's capability is needed.
Mr. Siegel said applications for financial products that backstop exports transactions soared 70% in the final three months of 2008, compared to the year-earlier period. That led the agency to post record-high business volumes in 2008, $85.8-billion, or a climb of 23% from the previous year. The number of customers also increased 11%, to 8,312 companies.
As of last Dec. 31, 82% of EDC's customer base is made up of small and medium-sized firms -- and that is down from 85% from a year ago, Mr. Siegel said, as "we have more large-sized exporters turning to us during this period."
A prevalent example is Nova Chemicals, which weeks ago secured $150-miillion of financing from a group led by EDC, which put up two-thirds of the amount, and a syndicate of three Canadian banks that pitched in the remainder.
But with this increased demand, EDC officials acknowledged it experienced increased claims activity and higher impaired loans as the year progressed -- and the pipeline of new business showed a "distinct" deteriorating in credit quality. They said they expect the trend toward higher claims and impaired loans to continue toward 2009.
For the year, it posted a 56% drop in profit, to $206-million, largely because it had to double its provision for credit losses to $346-million in light of the severe downturn in the automotive sector. Claims-related expenses also climbed by $90-million, or two-thirds, to $222-million for the year.
Nevertheless, the EDC said the amount of leverage on its books, at a 3:1 ratio, remains below what is carried by Canadian banks, and conservative when compared to U.S. and European lenders.
